Is Avago Chip Industry’s Cisco?

If Ford is a reference model for value chain in the Industrial Age, Cisco is the icon of the twenty-first-century digital economy. The networking gear maker, who achieved phenomenal growth with the rise of the Internet, has been remarkably successful in snapping up and integrating scores of companies for products it could not innovate.

Take Crescendo Communications, for instance, the company that Cisco bought in 1993 just to meet needs of two of its major customers: Boing and Ford. Eventually, the acquisition transformed Cisco from a router company to a routing-plus-switching vendor.

Avago’s aggressive acquisitions are reminiscent of Cisco’s 1990s era of takeovers
(Image: Avago)

Cisco made one acquisition after another to capture intellectual assets and next-generation technologies during the 1990s. By the end of the decade, Cisco had purchased more than 50 companies to dominate the enterprise networking market. Cisco mastered the art of mergers and acquisitions, meeting immediate objectives to expand into new market opportunities. This aggressive pattern had become its modus operandi to assemble new market strategies.

It’s pretty ironic that Cisco copied the HP model of dividing the market into small segments and leading each one of them. However, HP itself failed to respond to the web challenge while rivals like IBM and Sun Microsystems quickly identified themselves with the Internet tidal wave. In 1999, the company that more or less invented Silicon Valley decided to break itself to get more focused and nimble. The new HP would take care of computing and printers business while spin-off Agilent Technologies would oversee test and measurement operations.

Avago’s HP Lineage

And that fascinating technology history brings us to the talk of the town, Avago Technologies Ltd, an HP progeny that has rocked the semiconductor industry by gobbling a larger chipmaker than itself. Avago has mounted an ambitious $37 billion takeover of Broadcom Corp., the largest acquisition in high-tech history.

Avago has been a relatively less known company that usually remained outside the media limelight. That’s partly because its chief Hock Tan wanted to spend less on marketing. So it’d be worthwhile to take a peek at the company’s lineage to the HP Way and see how it has managed to become the sixth largest semiconductor company in the world.

In 2000, Agilent’s IC division created first-generation lab-on-a-chip that integrated a large number of chemical manipulations on a single die (Image: Agilent Technologies)

Avago’s genesis can be traced back to 1961 when HP started a semiconductor products division and began the pioneering work on products such as light-emitting-diode (LED) displays, fiber-optic transmitters and optical mouse sensors. However, after HP spun off Agilent Technologies in 1999, the history began repeating itself. The testing and measurement business took over the limelight in the new company and semiconductor products went to backwaters.

Consequently, Agilent, still a big piece of old HP, was ready to be split again in 2005. Private equity firms Silver Lake and Kohlberg Kravis Roberts & Co. spent $2.66 billion to acquire Agilent’s semiconductor business and created a new chip outfit: Avago. The new chipmaker—which specialized in markets such as lighting, fiber-optic gear and power amplifiers—went public in 2009 at $15 a share.

Avago’s Acquisition Spree

Avago has shown that it can make deals work. For example, in 2013, it acquired LSI Corp. for $6.6 billion. The purchase of LSI, a maker of networking and storage chips, allowed Avago to gain traction in rapidly growing cloud computing, web services and data center markets. Avago’s market value has tripled since it bought LSI less than two years ago.

Emulex Corp. is Avago’s most recent acquisition before the Broadcom deal. It’s interesting to note that Broadcom had tried to buy Emulex in a hostile takeover bid back in 2009. In February 2015, Avago gobbled the maker of network connectivity and monitoring chips for $600 million.

Avago—itself a product of two spin-offs—first went to shopping in 2008 when it bought Infineon’s bulk acoustic wave business for $23 million. The first full-fledged company that Avago acquired was CyOptics Inc., a supplier of optical chips and components for telecom and data communication markets that Avago snapped for $400 million in cash.

Hock Tan: A big job ahead of him

For the Broadcom takeover, interesting bits have surfaced in the media, and they clearly show that Avago’s latest chip deal is more about gaining scale than anything else. Back in February this year, when the news about NXP’s acquisition of Freescale surfaced, it has been reported that Avago was also a contender for Freescale.

There are other media reports about Avago being out with a horde of cash and trying to buy another chip company. The names Maxim Integrated, Renesas and Xilinx have emerged in relation to Avago’s pursuit of an acquisition just before the Broadcom deal.

The merger of Avago and Broadcom creates the second largest communications chipmaker after Qualcomm and fourth largest wireless chipmaker after Qualcomm, Samsung and MediaTek. That’s quite a bit of scale. Now Hock Tan and his lieutenants have to show that they can execute. The scale in case of “New Broadcom” is going to be much larger than LSI operations.

The new company will use the Broadcom brand once the merger is complete. The name Avago won’t be there anymore, but if Tan and his team are able to pull this off, the legacy of Avago will remain just like HP’s DNA. The scale of Avago’s acquisitions is nowhere near Cisco, but there are still similarities between the two companies.

Also read:

Semiconductor Acquisitions will Fuel Innovation!

End of the Road for Micrel

Three Colorful Bytes from the NXP History

Majeed Ahmad is author of books Smartphone: Mobile Revolution at the Crossroads of Communications, Computing and Consumer Electronics and The Next Web of 50 Billion Devices: Mobile Internet’s Past, Present and Future.